U.S. patent application number 09/862995 was filed with the patent office on 2002-05-02 for sales transactions for transfer of commodities.
Invention is credited to Dines, David, Inman, Dennis, Seeley, Jeffrey, Stone, Joseph, Tracy, Mark.
Application Number | 20020052817 09/862995 |
Document ID | / |
Family ID | 26937184 |
Filed Date | 2002-05-02 |
United States Patent
Application |
20020052817 |
Kind Code |
A1 |
Dines, David ; et
al. |
May 2, 2002 |
Sales transactions for transfer of commodities
Abstract
A method for transacting transfers of commodities includes
setting a first price for a first quantity of a commodity based on
an average price observed during a period of time and either a
premium or discount to the average price. A second price is set for
a second quantity of a commodity based on a price determined at a
future date. The second price does not exceed a maximum price in
the event a premium applies to the first quantity, or a minimum
price in the event a discount applies to the first quantity. The
first quantity and the second quantity are delivered from a seller
to a buyer, and the seller is paid a sum based on the first price,
the premium or discount, as applicable, and the second price.
Inventors: |
Dines, David; (Wayzata,
MN) ; Tracy, Mark; (Minneapolis, MN) ; Stone,
Joseph; (Petit Lancy, CH) ; Inman, Dennis;
(Eden Prairie, MN) ; Seeley, Jeffrey; (Chanhassen,
MN) |
Correspondence
Address: |
SHUMAKER & SIEFFERT, P.A.
150 Gateway Corporate Center 1
576 Bielenberg Drive
St.Paul
MN
55125
US
|
Family ID: |
26937184 |
Appl. No.: |
09/862995 |
Filed: |
May 22, 2001 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
|
60245373 |
Nov 2, 2000 |
|
|
|
Current U.S.
Class: |
705/36R ;
705/39 |
Current CPC
Class: |
G06Q 30/02 20130101;
G06Q 20/10 20130101; G06Q 40/06 20130101 |
Class at
Publication: |
705/36 ;
705/39 |
International
Class: |
G06F 017/60 |
Claims
1. A method for transacting exchanges of commodities, the method
comprising: setting a first price for a first quantity of a first
commodity based on an average price observed during a period of
time and a premium above the average price; setting a second price
for a second quantity of a second commodity based on a price
determined at a future date, wherein the second price is capped so
as to not exceed a maximum price; delivering both the first
quantity and the second quantity from a seller to a buyer; and
paying the seller a sum based on the first price, the premium, and
the second price.
2. The method of claim 1, wherein the first price is a per unit
price X1, the premium is a per unit price Y1, the second price is a
per unit price X2, the first quantity is Q1 units, the second
quantity is Q2 units, and the sum paid to the seller is based on
(X1+Y1)*Q1+X2*Q2.
3. The method of claim 1, wherein the seller is a producer of
commodities.
4. The method of claim 1, wherein the buyer is a reseller of
commodities.
5. The method of claim 1, wherein the commodities include at least
one of crude oil, heating oil, unleaded gasoline, jet fuel,
kerosene, propane, water, communication or computing bandwidth,
semiconductor chips, pollution/emission rights, gold, silver,
palladium, aluminum, copper, steel, and lead.
6. The method of claim 1, wherein the first commodity is the same
as the second commodity.
7. A method for transacting exchanges of commodities, the method
comprising: setting a first price for a first quantity of a first
commodity based on an average price observed during a period of
time and a discount to the average price; setting a second price
for a second quantity of a second commodity based on a price
determined at a future date, wherein the second price is floored so
as not to drop below a minimum price; delivering both the first
quantity and the second quantity from a seller to a buyer; and
paying the seller a sum based on the first price, the discount, and
the second price.
8. The method of claim 7, wherein the first price is a per unit
price X1, the discount is a per unit price Y1, the second price is
a per unit price X2, the first quantity is Q1 units, the second
quantity is Q2 units, and the sum paid to the seller is based on
(X1-Y1) *Q1+X2*Q2.
9. The method of claim 7, wherein the seller is an reseller of
commodities.
10. The method of claim 7, wherein the buyer is a reseller of
commodities.
11. The method of claim 7, wherein the commodities include at least
one of of crude oil, heating oil, unleaded gasoline, jet fuel,
kerosene, propane, water, communication or computing bandwidth,
semiconductor chips, pollution/emission rights, gold, silver,
palladium, aluminum, copper, steel, and lead.
12. The method of claim 7, wherein the first commodity is the same
as the second commodity.
13. A method for transacting exchanges of commodities, the method
comprising: setting a first price for a first quantity of a first
commodity based on an average price observed during a period of
time and a premium above the average price; setting a second price
for a second quantity of a second commodity based on a price
determined at a future date, wherein the second price is capped so
as not to exceed a maximum price; delivering at least the first
quantity from a seller to a buyer; and paying the seller a sum
based at least in part on the first price and the premium.
14. The method of claim 13, further comprising delivering both the
first quantity and the second quantity from the seller to the
buyer, and paying the seller a sum based on the first quantity, the
first price, the second quantity, the second price, and the
premium.
15. The method of claim 13, wherein the seller is a producer of
commodities.
16. The method of claim 13, wherein the buyer is a reseller of
commodities.
17. The method of claim 13, wherein the commodities include at
least one of crude oil, heating oil, unleaded gasoline, jet fuel,
kerosene, propane, water, communication or computing bandwidth,
semiconductor chips, pollution/emission rights, gold, silver,
palladium, aluminum, copper, steel, and lead.
18. The method of claim 13, wherein the first commodity is the same
as the second commodity.
19. A method for transacting exchanges of commodities, the method
comprising: setting a first price for a first quantity of a first
commodity based on an average price observed during a period of
time and a discount above the average price; setting a second price
for a second quantity of a second commodity based on a price
determined at a future date, wherein the second price is floored so
as not to drop below a minimum price; delivering at least the first
quantity from a seller to a buyer; and paying the seller a sum
based at least in part on the first price and the discount.
20. The method of claim 19, further comprising delivering both the
first quantity and the second quantity from the seller to the
buyer, and paying the seller a sum based on the first quantity, the
first price, the second quantity, the second price, and the
discount.
21. The method of claim 19, wherein the seller is a producer of
commodities.
22. The method of claim 19, wherein the buyer is a reseller of
commodities.
23. The method of claim 19, wherein the commodities include at
least one of crude oil, heating oil, unleaded gasoline, jet fuel,
kerosene, propane, water, communication or computing bandwidth,
semiconductor chips, pollution/emission rights, gold, silver,
palladium, aluminum, copper, steel, and lead.
24. The method of claim 19, wherein the first commodity is the same
as the second commodity.
Description
[0001] This application claims priority from U.S. provisional
Application No. 60/245,373, filed Nov. 2, 2000, the entire content
of which is incorporated herein by reference.
TECHNICAL FIELD
[0002] The invention relates to the commodities business and, more
particularly, to transactions involving the transfer of market
commodities.
BACKGROUND
[0003] To offset some of the risks associated with market
volatility in commodities market, sellers sometimes enter into
agreements with buyers of the commodities. The agreements often set
prices based on futures prices, and may include quantity
requirements, price floors, and price ceilings. With such an
agreement, the seller may achieve some level of comfort in his
ability to market commodities at a reasonable price. The agreement
thereby reduces the seller's vulnerability to price risks that can
cut into profits and drive him out of business. In return, the
buyer achieves access to a predetermined quantity of the commodity,
and is able to hedge the implicit risks associated with the price
obligations in the agreement.
SUMMARY
[0004] The invention is directed to a method for transacting
exchanges of commodities. The exchange may be transacted between a
buyer and a seller who is a producer of the commodity, or between a
buyer and a seller who is not producer. A seller, other than a
producer, may be an entity that buys commodities from a producer
(or another reseller) and then resells the commodities to another
buyer. Thus, a buyer may contract directly with a producer or with
an intermediary in the form of a buyer/reseller of commodities.
[0005] The invention presents techniques by which a buyer and a
seller may allocate their respective risks. The buyer guarantees an
average price for a first quantity of a first premium over the
average, or the seller guarantees a discount under the average,
depending upon variable pricing requirements applicable to a second
quantity of a second commodity. The first and second commodities
may be different commodities, such as silver and gold, or they may
be the same commodity.
[0006] In one embodiment, the invention provides a method for
transacting exchanges of commodities, the method comprising setting
a first price for a first quantity of a first commodity based on an
average price observed during a period of time and a premium above
the average price, setting a second price for a second quantity of
a second commodity based on a price determined at a future date,
wherein the second price is capped so as to not exceed a maximum
price, delivering both the first quantity and the second quantity
from a seller to a buyer, and paying the seller a sum based on the
first price, the premium, and the second price.
[0007] In another embodiment, the invention provides a method for
transacting exchanges of commodities, the method comprising setting
a first price for a first quantity of a first commodity based on an
average price observed during a period of time and a discount to
the average price, setting a second price for a second quantity of
a second commodity based on a price determined at a future date,
wherein the second price is floored so as not to drop below a
minimum price, delivering both the first quantity and the second
quantity from a seller to a buyer, and paying the seller a sum
based on the first price, the discount, and the second price.
[0008] The methods can provide a seller, such as a commodity
producer or or reseller of commodities, with greater price
certainty in exchange for delivery of both the first and second
quantities of the commodity. In addition, the methods can provide
the seller with a premium or a guaranteed minimum price. In return,
the buyer benefits from greater certainty with respect to quantity,
and can hedge the implicit risks associated with the price
obligations. In one embodiment, the price calculation for the first
quantity is based on an average price and includes a premium, while
the price calculation for the second quantity may be based on a
futures price and is subject to a maximum level. In an alternative
embodiment, instead of a premium, the first price may be subject to
a discount, in which case the price for the second amount is
subject to a minimum price level.
[0009] In another embodiment, the seller must deliver the second
quantity to the buyer in order to receive the premium for the first
quantity. In other embodiments, delivery of the second quantity may
be optional. In either case, delivery need not be physical, and may
refer to any other form of legal transfer of ownership directly or
indirectly from producer or reseller to buyer. However, the
agreement still is tied to a physical quantity of the commodity,
i.e., at least the first quantity. The method makes use of first
and second quantities with different price calculations that better
balance the risk between the seller and buyer. In addition, the
method ensures that more actual underlying commodity is exchanged
between the seller and the buyer. In this manner, the buyer and
seller both benefit from the arrangement.
[0010] The details of one or more embodiments of the invention are
set forth in the the description below. Other features, objects,
and advantages of the invention will be apparent from the
description, and from the claims.
DESCRIPTION OF THE DRAWINGS
[0011] FIG. 1 is a diagram illustrating the interaction between a
seller of a commodity and a buyer according to an embodiment of the
invention.
[0012] FIG. 2 is a diagram illustrating the interaction between a
seller of a commodity and a buyer according to another embodiment
of the invention.
DETAILED DESCRIPTION
[0013] In accordance with the invention, a method for transacting
exchanges of commodities includes setting a first price for a first
quantity of a first commodity. The first price is based on an
average price observed during a period of time and either a premium
or discount to the average price. Thus, the first price and premium
or discount are combined and applied to the first quantity to
produce a first amount that is payable to the seller by a buyer,
e.g., upon delivery of the first quantity.
[0014] The amount payable is not necessarily the cash price, i.e.,
the sum actually paid to the seller. The cash price reflects the
agreed-upon price for the commodity, but the cash price may also be
adjusted for factors such as quality.
[0015] A second price is set for a second quantity of a second
commodity. The second commodity may be the same as the first
commodity, for example, both the first and second commodities may
be silver. Alternatively, the first and second commodities may be
different commodities, such as silver and gold. Unlike the first
price, however, the second price is based on a price determined at
a future date. The second price may be, for example, a futures
price.
[0016] FIG. 1 illustrates a typical arrangement in accordance with
the invention. Buyer 12 agrees to buy a first quantity of a
commodity from a seller, producer 10, at a first price based on an
average price observed during a period of time (14). Buyer 12
further agrees to pay to producer 10 a premium above the average
price (16). In return, producer 10 agrees to provide the first
quantity at the first price (18). Producer 10 further agrees to
provide the second quantity at the second price, based on a futures
price. In addition, the second price is capped so as not to exceed
a maximum price (20). Thus, in the event the futures price exceeds
the maximum price, the second price is capped at the maximum price.
The second price is applied to the second quantity to determine a
second amount payable to producer 10 by buyer 12.
[0017] As a condition to receipt of the first amount, and thus the
premium, producer 10 must deliver both the first quantity (22) and
the second quantity (26), assuring buyer 12 a predefined quantity
level. In exchange, buyer 12 must pay producer 10 cash prices based
on the first and second amounts, which are based on application of
the sum of the first price and the premium or discount to the first
quantity (24) and application of the second price to the second
quantity (28).
[0018] FIG. 2 illustrates an alternate arrangement in accordance
with the invention, in which the second price is floored so as not
to go below a minimum price. Buyer 12 agrees to buy a first
quantity of a commodity from producer 10 at a first price based on
an average price observed during a period of time (40). Producer 10
agrees to provide the first quantity at the first price, which
includes a discount (44). Buyer 12 further agrees to pay to
producer 10 a second price for a second quantity, subject to a
minimum price (42), and producer 10 agrees to provide the second
quantity (46).
[0019] Producer 10 must deliver both the first quantity and the
second quantity (48, 52), assuring buyer 12 a predefined quantity
level. In exchange, buyer 12 must pay producer 10 cash prices based
on the first and second amounts (50, 54). Producer 10 accepts an
average price on the first quantity, less a discount. In return,
buyer 12 guarantees producer 10 a minimum price for the second
quantity, which may exceed the market price.
[0020] The term "producer" may refer to any producer or
manufacturer of a commodity, from an individual manufacturer to a
large corporate operation. A "commodity" produced by the producer
may take the form of any commodity commonly traded or likely to be
traded in the future on an open or closed market basis. Examples of
commodities that are presently traded on the open market include
crude oil, heating oil, unleaded gasoline, jet fuel, kerosene,
propane, water, communication or computing bandwidth, semiconductor
chips, pollution/emission rights, gold, silver, palladium,
aluminum, copper, steel, lead, other metals, and the like.
[0021] A "buyer" may take the form of an end purchaser of the
commodity for processing, integration, or resale, or any other
outlet for the commodity, and may form part of an integrated
commodities trader, or an entity or collection of entities that
purchase commodities and trades them on an open market. A "seller"
may be an producer or any other entity that buys commodities from a
producer or elsewhere and resells them to a buyer. Thus, the seller
may be a reseller or "middleman" who trades in commodities but does
not produce, process, or integrate them. A buyer, at a given level
in the transaction chain, also may be a reseller.
[0022] An agreement in support of the transaction may be between
producer and a buyer, or between a buyer/reseller and a buyer.
Thus, a buyer/reseller may have contractual obligations to both the
buyer and the producer, and can be viewed as an intermediary.
[0023] For an energy commodity such as crude oil, an example
transaction chain could include an oil producing company who sells
to a middleman that operates a tanker fleet. The middleman may ship
to a middleman refiner, who sells to a middleman trucking company.
Finally, the trucking company may sell to a gas station owner, who
dispenses gasoline to the end consumer.
[0024] With water as the commodity, an example transaction chain
could include a state that owns a reservoir, and sells to a water
utility company. The water utility company may then sell to an
irrigating farmer.
[0025] For metals, an example transaction chain could include a
mining company, who sells to a shipping company. The shipping
company may sell to a processor, who then sells to an end processor
or integrator, e.g., an automotive parts company or automobile
manufacturer.
[0026] A method in accordance with the present invention provides
an alternative to sellers and buyers. It provides an additional
premium over or discount below an average price observed during a
given time frame for an initial quantity exchanged. In addition, it
provides an opportunity to earn some limited benefit from price
changes affecting a second quantity committed at the same time.
[0027] To make the premium or discount feasible, the buyer and
seller agree to exchange an initial "first" quantity and pay the
average (plus or minus the premium or discount) of an observed
price over a known period. Also, the buyer and seller agree to
transact an exchange of the second quantity at a price to be
determined. The price for the second quantity may be determined by
reference to any mutually agreed upon index for the particular
commodity, such as a futures price.
[0028] In consideration of a premium paid to the seller, the price
for the second quantity may be made subject to a maximum price
level. In this case, the seller benefits from the premium on the
first quantity while the buyer benefits from a price ceiling on the
second quantity.
[0029] In consideration of the discount, the price of the second
quantity may be subject to a minimum price level. In this case, the
seller benefits from a price floor on the second quantity while the
buyer benefits from the discount on the first quantity.
[0030] In this manner, a buyer's customer, e.g., a commodities
producer, can get paid the average plus a known premium.
Conversely, a seller's customer, e.g., a commodities trader, can
acquire at the average less the known discount. In either case, the
price level for the second quantity is determined by another price
structure and is subject to the minimum price level in the case of
a discount or the maximum price level in the case of a premium.
[0031] Notably, there is no limit on how high or low the average
price may go for purposes of calculating the first price for the
first quantity. In addition, two distinct methods are used to price
the first and second quantities. There is no option on the part of
the buyer or seller to take or make delivery of the first quantity.
In addition, for regulatory compliance, there ordinarily will be no
option to take or make delivery of the second quantity. Rather,
delivery of both quantities at the agreed upon prices ordinarily
will be mandatory under the agreement. If regulatory requirements
change, however, it is conceivable that delivery of the second
quantity may be optional and determined by the level of the second
price at the time of delivery or some other time agreed upon by the
parties.
[0032] The premium or discount may be above, equal to, or below the
predefined average depending on the specifics of a particular
commodity or combination of commodities. The premium or discount
may be paid and received at any time agreed upon by the buyer and
seller. Timing of the payment could result, for example, in
implicit financing revenue or cost to either or both parties.
[0033] As further distinctions, the method need not result in
indemnified profit sharing between the buyer and seller. Instead,
it guarantees a premium over the average or a discount under the
average for the first quantity, in consideration of variable
pricing requirements applicable to the second quantity. The pricing
structure for the second quantity presents a risk to both the buyer
and seller.
[0034] According to the invention, a contract between the parties
may include:
[0035] (a) A first agreement for a buyer and seller to receive and
pay, respectively, the average price observed during a given time
frame plus a premium or minus a discount for an initial quantity.
The calculation method for the average price is predefined and no
boundaries on the averaging points need exist.
[0036] (b) A mandatory second agreement, made simultaneously and
inseparable from the first agreement, providing that in exchange
for the premium or discount, as the case may be, the buyer and
seller will receive and deliver, respectively, a second quantity
based on a price to be known at a future date. The price at the
future date may be limited to a maximum in the case a premium is
applied to the first quantity, or a minimum in the case a discount
is applied to the first quantity.
[0037] To establish the average price, the parties may agree to a
readily observable price with known observation times, dates, and
other conditions. For example, the parties may agree to observe the
price every day, every other day, every week, every month, on
selected dates, and so forth. Any observable price may be used.
Exchange-based futures prices are a common source of averaging
points, and are suitable for this calculation. The parties may
agree, for example, that the observed price on a particular day
shall be the closing price on the exchange that day. Other indices
of average price may be used.
[0038] The parties may agree to calculate the average price in many
ways. Typically, the parties would use the arithmetic mean, but
they may agree to other methods of calculation, such as a weighted
average or a median or a mode.
[0039] To create the maximum or minimum price, the parties may
additionally commit to a pricing structure that may resemble an
option. The date and time of the beginning and ending of the
averaging period for the first quantity and the pricing structure
for the second quantity are determined at the time of
contracting.
[0040] As an example, assume that the date is Jun. 2, 2002 and that
February 2003 futures for gold at a particular exchange are trading
at 338.00 (dollars per ounce). Also assume that a producer wants to
sell a commodity for future delivery in November 2002. For a first
quantity of the commodity, e.g., a first half, the producer would
like to earn a premium in excess of the average price observed from
June through Nov. 15, 2002. The producer also would like to have a
confirmed agreement to sell a second quantity of the commodity,
e.g., a second half, at the prevailing price on Nov. 15, 2002.
[0041] The producer believes that prices are unlikely to be above
364.00 on Nov. 15, 2002, but considers that to be a desirable price
for the second half. Therefore, he is willing to forego potential
gains above 364.00 on the second half, in exchange for a guaranteed
premium of ten dollars per unit above the average for the first
half. Thus, for this example, the producer agrees to exchange the
first half at the average plus the premium, and the second half at
the ending price subject to the maximum of 364.00.
[0042] In a first case, prices fall from 338.00 on Jun. 2, 2002 to
249.00 on Nov. 14, 2002, and the average over that period is
277.00. Application of the average of 277.00 to the first half is
better than taking the ending value. Additionally, earning the
extra ten dollar premium above the average for the first half for a
total of 287.00 is even better. The second half earns the lower
ending price of 249.00, but is buoyed by the price for the first
half.
[0043] In a second case, prices rise from 338.00 to 339.00 between
Jun. 2, 2002 and Nov. 14, 2002, and the average over that period is
335.00. In this case, earning the extra ten dollars above the
average for a total of 345.00 for the first half of the owner's
supply of the commodity is better than both the beginning and
ending prices, as well as the average. The second half of the
owner's supply is delivered at the ending price of 339.00, making
for a rather successful marketing result for the producer's total
commodity.
[0044] In a third case, prices rise from 338.00 to 366.00 between
Jun. 2, 2002 and Nov. 14, 2002, and the average over that period is
362.00. The producer is paid the average of 362.00 plus the ten
dollar premium for a total of 372.00 for the first half of the
owner's supply. The second half of the owner's supply earns 364.00
because the ending price of 366.00 barely exceeded the agreed upon
maximum of 364.00. In this case, the buyer benefits slightly from
the maximum price applied to the second half of the owner's
supply.
[0045] In a fourth case, prices rise from 338.00 to 412.00 between
Jun. 2, 2002 and Nov. 14, 2002, and the average over that period is
378.00. With the ten dollar premium, the price for the first half
of the commodity is 388.00. The second half of the commodity is the
maximum of 364.00 as the ending price greatly exceeded the maximum.
For this case, the buyer benefits significantly from the maximum
price applied to the second half of the commodity.
[0046] Scenarios similar to those above can be envisioned for an
arrangement in which a seller and buyer agree that the first
quantity will be subject to an average price minus a discount, and
the second quantity will be an ending price subject to a minimum
price. In some instances, the minimum will benefit the seller by
insulating the second quantity against excessive downward price
trends. In other instances, the discount provided to the buyer will
compensate for excessive price increases.
[0047] The method is applicable to a variety of implementations.
The method may be carried out manually, for example, between the
buyer and seller of the commodities. It may be practiced at
multiple levels in the supply channel, i.e., between the producer
and intermediate buyer, and then between the intermediate buyer (as
seller) and a subsequent buyer. One or more intermediate buyers are
envisioned. The method may benefit from automation and aggregation
at the intermediate level, permitting a trader situated upstream
from an intermediate trader to take on an aggregation of contracts
in accordance with the method rather than individual contracts with
producers. Moreover, the confidentiality of the ultimate buyer or
seller and the producer may be preserved. In particular, the
intermediate buyer/reseller need not disclose their identities,
providing the advantage of anonymity. A suitable delivery system
for implementation of aggregation and anonymity is described in
U.S. provisional application Ser. No. 60/245,412, to David E. Dines
et al., entitled "Sales Transactions for Transfer of Commodities,"
filed Nov. 2, 2000.
[0048] A number of embodiments of the present invention have been
described. Nevertheless, it will be understood that various
modifications may be made without departing from the spirit and
scope of the invention. Accordingly, other embodiments are within
the scope of the following claims.
* * * * *